Punjab National Bank: Paradigm shift in banking landscape

Punjab National Bank highlights ongoing trend of new entrants, technology, consumer expectations and competition

Punjab National Bank (PNB), which has been in operation for 122 years and has more than 100 million customers, has seen consistent growth in operating profit, stable asset quality and increased pace of digitalisation. The bank's operating profit rose to Rs64.96 billion in the first half of FY 2018 (up from Rs55.52 billion in the previous fiscal's first-half) and net profit went up to Rs9.04 billion (Rs8.56 billion in H1 FY17).
Excerpts from an exclusive interview with Sunil Mehta, Managing Director and Chief Executive Officer of the bank:

What are your views on the prospects for the Indian economy in 2018-19?

The pointers are that India's growth rate will accelerate over the coming years. India's future is looking good on several fronts. The growth fundamentals were already in place, but now the clear signs of pick-up in growth momentum and business expectations are there; IIP numbers are improving, manufacturing and capital goods sectors are growing and PMI is looking up. Furthermore, the strong private consumption and services are expected to continue to support economic activity. GDP growth in India is expected to accelerate to around 7 per cent in 2018-19 from 6.5 per cent in this fiscal, shaking off the disruptions from demonetisation and introduction of the Goods and Services Tax (GST).
As per the World Bank's Global Economics Prospect (GEP) 2018, India's GDP growth is expected to pick up to 7.3 per cent in 2018-19 and to 7.5 per cent for the next two years. Consumption demand too is forecast to improve aided by pent up demand from last year's demonetisation and fresh demand from wage revisions. On the investment side, a gradual pick-up is foreseen as the government will continue the thrust on infrastructure development and private sector balance sheet weaknesses are likely to be mitigated with the positive developments.
Moreover, the recapitalisation package for public sector banks announced by the government is expected to help resolve banking sector balance sheets, support credit to the private sector and lift investment, while the global trade recovery is expected to lift exports.

How is the banking sector expected to perform during the coming years?

The banking sector is expected to perform better in the coming years as the economic growth momentum, recapitalisation package and strengthening of recovery and resolution windows will address the major challenges. During FY18, banks are still witnessing high NPAs, necessitating sizeable provisioning and deleveraging. However, on the other hand stressed assets of banks have begun to stabilise on account of decline in slippage ratio albeit at an elevated level. Furthermore, during the first-half of FY 2017-18 there has been a modest pick-up in bank credit.
Going forward, addressing asset quality concerns and strengthening banks' balance sheets to reinvigorate credit growth remain key priorities, within the overall objective of promoting a competitive and efficient banking sector. As regards stress in the banking system, banks will take advantage of the Insolvency & Bankruptcy Code (IBC) to clean up their balance sheets and improve performance on a sustained basis to remain competitive.
Until 2017, the focus had been on recognition of bad loans clogging the system. Resolution and recovery are expected to take off in FY 18-19. Further, the recapitalisation plan of the government will help banks to fund their growth expansion. Hence, banks may witness the further increase in the credit growth.
However, banks are likely to face challenge on the liability side since the deposits growth rate lags behind the credit growth rate. However, India's young demographics, increased disposable incomes, rising consumerism and push towards physical and social infrastructure are expected to provide greater opportunities.
In the fast changing financial landscape, banks will need to rework their business strategies, innovate on products tailored to customers' needs, and improve efficiency in the delivery of customer-centric financial services to regain their role as principal financial intermediaries.

Do you see a lot of churn happening in the sector, especially with major PSBs likely to take over some of the smaller ones?

The banking landscape has undergone a paradigm shift over the years in terms of new entrants, technology, consumer expectations and competition and the trend is likely to continue.
For the consolidation of PSBs alternative mechanism to oversee the proposals coming from boards of PSBs for consolidation and mergers is being crystallised.
In my opinion it is too early to comment on this front. Government is also considering recapitalisation of banks and has already announced a Rs2.1 trillion (over $32 billion) capital infusion plan for state-owned banks. I think recapitalisation of banks and the reform process are the steps to strengthen them, build capacity so that mergers are not just one way process, but work out to the mutual advantage based on synergies. Factors like regional balance, geographical reach, technology and smooth human resource transition are the likely synergistic factors that would be looked into while taking a merger decision.

Some Indian banks with a strong overseas presence are planning to consolidate their operations. Any plans PNB has for its overseas operations?

PNB plans to strengthen its overseas operations by focusing on products suitable for the local diaspora. A systemic drive is on to reorient the business model of our overseas offices to concentrate on the local economy. They are being guided to capture locally available opportunities rather than remaining dependent on business of Indian customers there. We see positive impact of the approach on the profitability of our overseas offices.

Could you tell us about your presence in the Gulf NRI market? Are you planning to expand your services to NRIs in the region?

We have a branch at the Dubai International Finance Centre (DIFC) and a full-fledged representative office in Dubai. Further, we are examining possibilities of placing marketing professionals in different areas of Gulf countries having NRI market potential. Meanwhile our local branches in the areas with high concentration of NRIs (from Punjab, Maharashtra, Gujarat and southern states in India) continue reaching out to NRIs, especially during festive seasons.

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